Did stress trigger the global recession?

The new study suggests that City traders are less likely to hold their nerve and make good decisions during times of financial crisis, worsening economic decline.

London - Long-term stress can make people less likely to take advantage of opportunities by taking risks, a new study has found.

Those with high levels of the stress hormone cortisol over long periods can make people less risk-averse and more pessimistic, according to Cambridge University researchers.

The new study suggests that City traders are less likely to hold their nerve and make good decisions during times of financial crisis, worsening economic decline.

The research, published in the Proceedings of the National Academy of Sciences, tracked the cortisol levels of a group of volunteers placed in conditions similar to a financial trading business.

The study was designed to mimic earlier research that showed a 68 percent hike in cortisol levels among real City of London traders as market volatility increased over a period of two weeks.

The researchers found those with higher stress levels were less likely to take risks.

Dr John Coates, a member of the Cambridge University research team and a former Wall Street derivatives trader, said: “Any trader knows that their body is taken on roller-coaster ride by the markets.

“What we haven’t known until this study was that these physiological changes - the sub-clinical levels of stress of which we are only dimly aware - are actually altering our ability to take risk.

“It is frightening to realise that no one in the financial world - not the traders, not the risk managers, not the central bankers - knows that these subterranean shifts in risk appetite are taking place.”

Cortisol, secreted by the adrenal glands, fuels the “fight or flight” response that evolved to aid survival in the face of physical threats, such as predators.

Over an eight day period, the volunteers - 20 men and 16 women aged 20 to 36 - were given an artificial form of cortisol that raised their levels of the stress hormone by 69 percent, mimicking the increase seen previously in traders.

Initial spikes of cortisol had little effect on behaviour, but over time the willingness of participants to take risks fell dramatically.

Dr Coates added: “Traders, risk managers, and central banks cannot hope to manage risk if they do not understand that the drivers of risk taking lurk deep in our bodies.

“Risk managers who fail to understand this will have as little success as fire fighters spraying water at the tips of flames.” - Daily Mail